In a telling report of the reality of the changing business dynamics, the recently released “DC Advisor Insights” by NMG Consulting and longtime industry researcher Joshua Dietch, details how retirement and wealth are converging at the workplace, driven in part by declining fees and eroding margins, just as the recent McKinsey report lays out for record keepers. “Convergence is accelerating,” noted Dietch. “Advisors have to decide which business they are in, with the Triple F business model unsustainable.”
The study with 579 advisors, 100 specialist RPAs with 60+% plan revenue, 110 hybrids with 30%-59% and the remaining wealth advisors with some plans, reveals that hybrids are faring better while the fringes, especially those that only focus on retirement, suffer. RPAs that focus solely on retirement, which includes about 30%, have as much as 15% lower margins.
Eighty percent of RPAs expect to grow revenue but are less optimistic about profits. The vast majority are focused on their wealth business, which accounts for only 20% of their revenue. Much fewer wealth advisors are looking to add more retirement plans as their current margins are healthy, and they have less pressure to add new clients.
Most RPAs charge asset-based fees, which grow with the plan, sustaining margins, but the move to a flat fee erodes profitability, forcing RPAs to win more plans to grow revenue, requiring increased staff, unlike wealth advisors, keeping margins flat. These margins decline, like with record keepers, with larger plans.
Most advisors focus on plans under $10 million, with specialists moving up market. The only way for these RPAs to grow margins in larger plans is to offer participant services just like record keepers—McKinsey warns record keepers to move from product to participant focus or, as 401k Marketing founder and CMO Rebecca Hourihan advises, “Focus on the people, not the plan.”
The forces of convergence are pitting advisors against record keepers, reshaping expectations. “DC specialists seek integrated technology, transparent pricing and participant engagement tools, and hybrids want customization, education and marketing support,” Dietch said. “Wealth advisors prioritize ease of doing business, low administrative burden and streamlined rollovers.”
Hybrids, which include five times as many RPA specialists according to Cerulli*, are best positioned to leverage the convergence of wealth and retirement at the workplace, offering record keepers willing to support their efforts significant opportunities. Reaching hybrids may be a challenge if the providers do not have retail wholesalers, which are the majority, and they may look to DCIO partners that do.
The NMG report shows little activity in cross-selling benefits to participants, with just 10% adding managed accounts and even fewer adding HSAs and emergency savings accounts (student loans are not mentioned). The use of AI is growing, but mostly to increase productivity—most RPAs do not favor guaranteed in-plan retirement income, with systematic withdrawals most popular. Though 21% of RPAs are interested in PEPs, client awareness is solely a function of advisor interest.
While the NMG study may seem like the death knell for RPAs that do not offer wealth services focused mainly on investments, plan design and fees, the reality is that they still offer clients a valuable service who may look elsewhere for participant services, while highly compensated employees will use their personal advisor to manage their DC accounts through platforms like Pontera. Regardless, purists will struggle to compete with advisors that offer lower plan fees supplemented by participant services and against RPAs, which are part of an aggregator that can leverage scale.
And though many RPAs are racing towards wealth, most struggle—acquisitions of wealth practices seem to be the most common strategy but that takes time, senior-level expertise and infrastructure. Firms that only look to service highly compensated employees are much less attractive than those that offer advice to the masses through managed accounts, for example.
Just like record keepers that have an established wealth service business like Fidelity, Schwab and Vanguard with Empower growing quickly reaching $100 billion in wealth after the acquisition of Personal Capital and on the hunt to buy a national RIA, advisors with established wealth practices and significant plan expertise like hybrids are best positioned as the retirement and wealth worlds collide evidenced brilliantly outlined by the recent NMG study.
*Cerulli defines specialist as those with more than 50% plan revenue and hybrids with 15%-49%.
